Tuesday 31 March 2009

UK: Takeover Code - new edition published

A new edition of the Takeover Code was published yesterday by the Takeover Panel. Changes include those announced in a couple of response statements published last year (RS 2008/2: miscellaneous code amendments and [2]RS 2008/3: electronic communications, websites and information rights), one of which will permit offerors and offeree companies to use electronic forms of communication (e.g., websites and e-mail) to send information about offers to offeree company shareholders. A brief explanation of the changes is provided in this press release

Monday 30 March 2009

Canada: CCGG policy on "say on pay" votes

Earlier this year the Canadian Coalition for Good Governance (an organisation representing the interests of institutional investors) published for comment its draft executive compensation principles. The CCGG did not, at the time, support the adoption of a mandatory "say on pay" vote.  Several days ago, the CCGG published a statement on shareholder engagement and "say on pay" in which it further clarified its position in this area:

CCGG regards “Say on Pay” shareholder advisory resolutions as an important part of this ongoing integrated engagement process between shareholders and boards, giving shareholders an opportunity to express directly to the board their satisfaction with the prior year’s compensation plan and actual awards. CCGG recommends that boards voluntarily add to each annual meeting agenda an advisory shareholder resolution on the report of their human resources or similar committee, their compensation plan and the prior year’s awards.

The CCGG states that it will soon be publishing a model form of board "say on pay" policy and shareholder resolution. 

Friday 27 March 2009

USA: financial regulation reform - framework outlined by Treasury

The US Treasury has begun to outline its proposals for the development of a new model of financial regulation. Yesterday proposals with regard to systematic risk were outlined (forthcoming proposals will address the protection of consumers and investors, removing gaps in the regulatory structure and fostering international cooperation). The new framework has been described as "new rules of the road" not "modest repairs at the margin" by Treasury Secretary Timothy Geithner. In broad outline the proposals concerning systematic risk include: 
  • A single independent regulator with responsibility over systemically important firms and critical payment and settlement systems
  • Higher standards on capital and risk management for systemically important firms
  • Registration of all hedge fund advisers with assets under management above a certain threshold
  • A comprehensive framework of oversight, protections and disclosure for the OTC derivatives market
  • New requirements for money market funds to reduce the risk of rapid withdrawals
For comment see here (International Herald Tribune) and here (Financial Times). 

ICGN Statement and Guidance on Anti-Corruption Practices

The International Corporate Governance Network has published a Statement and Guidance on Anti-Corruption Practices. After setting out why anti-corruption is of concern to shareholders, the document provides questions for investors to assist in their engagement with companies with regard to anti-corruption and bribery.

Thursday 26 March 2009

UK: Corporation Tax Act 2009 receives Royal Assent

Hansard reports that the Corporation Tax Act 2009 has today received Royal Assent. Explanatory notes will be published soon on OPSI. When the Bill received its second reading in the House of Lords it was described by Viscount Trenchard as the longest ever to come before Parliament (an honour - if that is the right word - formerly held by the Companies Bill, now the Companies Act 2006). At third reading in the House of Lords, Government minister Lord Davies of Oldham provided this brief overview of the Bill:

... this Bill rewrites certain basic provisions such as the charge to corporation tax and provisions used by companies in computing their income. The main aim is to make the legislation clearer, better structured and easier to use than the source legislation, which is often dense and difficult to follow. The Bill has been produced by Her Majesty’s Revenue and Customs Tax Law Rewrite Project. It is the first of two Bills that will rewrite corporation tax. The second will be introduced later this year, along with another which will rewrite international and other provisions, some of which apply for the purposes of both income tax and corporation tax. The work follows the success of the project’s previous Acts which rewrote the capital allowances and income tax legislation".

Update (27 March 2009): The following have been added to the OPSI website:
Explanatory Notes | Table of Origins | Table of Destinations

UK: the auditor's report - revised standard published by APB

The Auditing Practices Board has today published a revised edition of auditing standard ISA (UK and Ireland) 700: the Auditor's Report on Financial Statements. In the press release accompanying publication of the revised standard, the APB states:

Improving the conciseness of the auditor’s report is the first phase of APB’s work to respond to the views of commentators [on the 2007 discussion paper "The Auditor’s Report: A time for change?"]. The new ISA (UK and Ireland) 700 (Revised) facilitates shorter auditor’s reports in a number of ways including allowing cross reference to a “Statement of the Scope of an Audit” maintained on APB’s web-site".

Accompanying the revised standard, but not part of it, are several illustrative auditor's reports. 

UK: England and Wales: draft Bribery Bill published

Last year the Law Commission for England and Wales published its report Reforming Bribery. Major reform was proposed including the introduction of a new corporate offence: negligently failing to prevent bribery by an employee or agent. The Government welcomed the Commission's recommendations and yesterday the Ministry of Justice published a draft Bribery Bill including explanatory notes. Interestingly the new corporate offence is described as an example of the Government's policy of promoting good corporate governance. 

Wednesday 25 March 2009

Europe: directors' remuneration - European Corporate Governance Forum identifies best practice

The European Corporate Governance Forum has published a statement concerning directors' remuneration. The statement sets out the Forum's position on the key elements of best practice with regard to remuneration. The Forum calls for improvements in three areas: the disclosure of directors' remuneration; the process whereby remuneration is set (including the role of remuneration consultants); and the substance of directors' remuneration.

The Forum recommends, inter alia, that non-executive directors should benchmark executive directors' pay with peers but also within the company in order to ensure "a consistent and fair remuneration policy throughout the company". The Forum also recommends that, to the extent possible by law, companies should reserve the right, at the discretion of the non-executive directors, to reclaim performance linked remuneration paid to executive directors on the basis of results subsequently found to have been significantly misstated through wrongdoing or malpractice.

Tuesday 24 March 2009

Europe: share ownership of listed companies

The Federation of European Securities Exchanges regularly publishes research concerning the ownership of listed company shares in Europe. The final version of its 2007 survey was published in December 2008 and makes for very interesting reading, not least because it serves to highlight the significance of institutional investor ownership in the United Kingdom, something not seen to the same extent in other European countries. Also of interest are the data concerning individual ownership of listed company shares. Such ownership exceeds 20% in only two countries: Italy and Spain.

Monday 23 March 2009

UK: courage and the non-executive director

Yesterday's Observer newspaper reported claims by Lord Foulkes of Cumnock that at least three of Royal Bank of Scotland's former non-executive directors "may have been intimidated and threatened with the sack for asking searching questions about its financial affairs". The role of non-executive directors is under the spotlight, as part of the Walker and FRC reviews of corporate governance.

The FSA is also updating its Statements of Principle and Code of Practice for Approved Persons (APER) to provide, for the first time, an explanation of the expectations placed upon non-executive directors of FSA regulated firms. This focuses on the non-executive director's role but does not identify what is arguably the most important personal trait a non-executive director should possess: courage. If non-executive directors are unwilling to challenge, a fundamental principle of the Combined Code - that no individual or small group of individuals should dominate decision making - is threatened. 

The importance of courage on the part of the non-executive directors has been recognised by the courts: see, e.g., Secretary of State for Trade & Industry v Swan & Ors [2005] EWHC 603 (Ch), para. [241].

UK: Frank Field MP proposes ban on short selling and enhanced disclosure of stock lending

Last week Frank Field MP supported the introduction of Bill Cash's Protection of Shareholders Bill. Today, Mr Field is introducing his own Private Members' Bill, the purpose of which is to ban the short selling of shares and to require disclosure by pension funds and their trustees of shares loaned for the purpose of short selling and the fees received in this regard. A copy of the Bill is available here


[a] Whilst the ban on short selling of financial stocks has been lifted in the UK (see here), it has continued elsewhere. For example, in Australia, ASIC announced earlier this month that its ban would continue until 31 May 2009. 

[b] The International Corporate Governance Network has published a code of best practice in respect of stock lending. This views as desirable the lending of shares but provides that the returns from lending should be separately disclosed from other investment returns when reporting to clients or beneficiaries.  

Friday 20 March 2009

UK: implied terms and the articles of association

Earlier this week the Judicial Committee of the Privy Council handed down its opinion in Attorney General of Belize & Ors v Belize Telecom Ltd & Anor (Belize) [2009] UKPC 11, a case on appeal from the Belize Court of Appeal concerning implied terms and the articles of association.

A company had been formed to take over a public body - the Belize Telecommunications Authority - in order that the Government could sell its financial interest. Through a special shareholding the Government retained a degree of control through the right to appoint directors. The company's articles contained provisions about the appointment of such directors but were silent on the circumstances in which such appointees would cease to hold office. 

The question before the courts was whether a term should be implied in the articles of association whereby directors appointed by the holder of a special share would cease to hold office where that special share was redeemed or the right to appoint no longer existed. In the Belize Supreme Court, the trial judge implied such a term. The Belize Court of Appeal disagreed. 

Lord Hoffmann, delivering the Judicial Committee's opinion, held that a term requiring the directors to vacate office should be implied. His Lordship explored the circumstances in which terms could be implied into contracts and observed (para. [30[):

... if one considers the role of the Government Appointed Directors and the policy of giving the Government the power to require redemption of the special share, namely, to enable it to relinquish its influence over the conduct of the company's business, the articles cannot reasonably mean that the Government Appointed Directors should remain in office after the special share has ceased to exist. They must be read as providing by implication that when the special share goes, the Government Appointed Directors go with it. In the opinion of the Board it is no answer to say that the special shareholder could have thought of the problem in advance and removed the Government Appointed Directors before redemption. No doubt he could, but the question is what the articles mean in the situation in which he has not done so. Nor is it relevant that the articles could be amended. They must be construed as they stand".

The English courts have held that terms cannot be implied into the articles of association based on extrinsic evidence (see, e.g., Dashfield & Anor v Davidson & Ors [2008] EWHC 486 (Ch)) and in this regard Lord Hoffmann observed (para. [37]):

The implication as to the composition of the board is not based upon extrinsic evidence of which only a limited number of people would have known but upon the scheme of the articles themselves and, to a very limited extent, such background as was apparent from the memorandum of association and everyone in Belize would have known, namely that telecommunications had been a state monopoly and that the company was part of a scheme of privatisation"

OECD and IAIS publish issues paper on insurer corporate governance

The OECD and IAIS have begun a public consultation in respect of their joint issues paper on the main issues relevant to the corporate governance of insurers. The paper discusses, inter alia, governance structures, board functions, risk management, the external auditor's role, disclosure and transparency and relationships with stakeholders. The paper's purpose is not to present proposals or recommendations but to inform the future work of the OECD and IAIS. It makes for interesting reading because it does not focus on a single jurisdiction.

Note: in 2005 the OECD published guidelines for insurers' governance and in 2007 the IAIS published recommendations for the governance of insurers

Thursday 19 March 2009

Australia: directors' remuneration review and termination payments

A couple of developments from Australia. First, the Government is proposing that directors' termination payments exceeding one year's base salary will require shareholder approval - see here. Second, and more broadly, the Government has asked the Productivity Commission to undertake a review of the regulation of directors' remuneration. The Commission has been asked to consider the following matters (its full terms of reference are available here):
  • Trends in director and executive remuneration in Australia and internationally
  • The effectiveness of the existing framework for the oversight, accountability and transparency of director and executive remuneration practices 
  • The role of institutional and retail shareholders in the development, setting, reporting and consideration of remuneration practices
  • Any mechanisms that would better align the interests of boards and executives with those of shareholders and the wider community
  • The effectiveness of the international responses to remuneration issues arising from the global financial crisis

Wednesday 18 March 2009

UK: the Turner Review of Global Banking Regulation

The Financial Services Authority has today published the Turner Review: a Regulatory Response to the Global Banking Crisis. A short overview will be posted soon...

UK: FRC announces review of the effectiveness of the Combined Code

The Financial Reporting Council has today announced a review of the effectiveness of the Combined Code on Corporate Governance. A call for evidence has been published here

In the accompanying press release, the FRC states it is inviting views on all aspects of the Code but would particularly welcome comments concerning:
  • The composition and effectiveness of the board as a whole
  • The respective roles of the chairman, the executive leadership of the company and the non-executive directors
  • The board’s role in relation to risk management
  • The role of the remuneration committee
  • The quality of support and information available to the board and its committees
  • The content and effectiveness of Section 2 of the Code, which is addressed to institutional shareholders
  • How the operation of the 'comply or explain' principle could be improved
The FRC states that it will be working closely with Sir David Walker's separate review of bank corporate governance, with which it will share evidence and research. 

UK: the Protection of Shareholders Bill

In 1987 William Cash MP introduced into Parliament the Protection of Shareholders Bill. It did not become law. Twenty two years later he is trying again and will today hold a press conference to gain support for his new Protection of Shareholders Bill, the purpose of which is to give a greater voice to private shareholders (as opposed to the institutional shareholders, which hold the majority of UK listed company shares). 

The Bill will require all public companies to establish a Shareholders Committee unless the private shareholders decide otherwise. The members of the Committee will be elected, or re-elected, annually at the AGM, by a vote of the private shareholders. The Committee will meet with a nominated director at regular intervals and will have the same powers as the directors to communicate with the shareholders. The Bill has the support of the UK Shareholders Association, which has provided an overview of the Bill. It is unlikely to receive Government support. 

Update (18 March 2009): a copy of the Bill is available here. It received its first reading today in the House of Commons and is scheduled for second reading on 26 June 2009. 

Tuesday 17 March 2009

UK: the Open-Ended Investment Companies (Amendment) Regulations 2009

The Open-Ended Investment Companies (Amendment) Regulations 2009 were made on March 5 and came into force on March 6. They have been published on OPSI here (html) and here (pdf). An explanatory memorandum is available here (pdf). The Regulations allow transfers of title to shares in OEICs to be made electronically (a paper instrument of transfer was formerly required).

UK: the Unit Trusts (Electronic Communications) Order 2009

The Unit Trusts (Electronic Communications) Order 2009 was made on 5 March and came into force on 6 March. A copy of the Order has been published on OPSI: see here (html) or here (pdf). An explanatory memorandum is available here (pdf). The Order permits transfers of title to units in authorised unit trusts to be made electronically (a paper instrument of transfer was previously required).

Monday 16 March 2009

Japan: corporate governance reform

Bloomberg reports here some recent comments by Hiroaki Niihara, the director of the Corporate System Division of Japan's Ministry of Economy, Trade and Industry. The comments were made against the background of an ongoing review of corporate law and listing rules due to report in June. Niihara focused on the role of outside directors and argued for greater protection for minority shareholders in listed companies. 

For further information about corporate governance in Japan, see the 2008 white paper published by the Asian Corporate Governance Association.

UK: the Companies (Share Capital and Acquisition by Company of its Own Shares) Regulations 2009 - draft published

The Department for Business, Enterprise and Regulatory Reform has published for comment a draft of the Companies (Share Capital and Acquisition by Company of its Own Shares) Regulations 2009. The purpose of the Regulations is to make amendments to provisions within Part 17 (A company's share capital) and Part 18 (Acquisition by a limited company of its own shares) of the Companies Act (2006), including:
  • The minimum pre-emption rights issue subscription period in section 562(5) of the 2006 Act will be reduced from 21 days to 14 days (in line with a recommendation made by the Rights Issue Review Group in November 2008; for related changes to the Listing Rules, see here).
  • A new requirement will be introduced in section 646 of the 2006 Act requiring creditors objecting to a reduction in a company's capital to demonstrate that their claim is at risk and the company has not provided adequate safeguards.
The Government intends to bring the Regulations into force on 1 October 2009.

Friday 13 March 2009

Belgium: new corporate governance code published

A new edition of the Belgian corporate governance code was published yesterday by Belgium's Corporate Governance Committee. A copy is available here in English. The new code replaces the 2004 edition and applies to reporting periods beginning on or after 1 January 2009. A summary of the main changes, in English, is available here. This document also contains useful information about the changes and the opinions of consultees. 

Two aspects of the new Code have caught my attention. The Belgian Code, unlike the UK's Combined Code, sets out the minimum number of meetings that board committee should have each year. The audit committee, for example, should meet at least four times a year. The Code also contains a new provision concerning directors' severance pay. Provision 7.18 recommends that for contracts entered into on or after 1 July 2009, severance pay should not exceed 12 months' basic and variable remuneration. When the new Code was the subject of consultation last year, a limit of 18 months was proposed.

UK: England and Wales: a partner's duty of skill and care - an objective standard

[Updated 16 March] There are very few cases considering the duty of skill and care owed by partners towards their partnership. Indeed, as the Law Commissions observed in their 2003 joint report on partnership law, "[t]he [Partnership] 1890 Act contains no statement of the duty of care which a partner owes to the partnership. There is uncertainty in both jurisdictions as to the standard of care which is imposed on a partner" (para. 11.16).

Against this background, Tann v Herrington [2009] EWHC 445 (Ch); [2009] WLR (D) 89 is important because the trial judge held that a partner owed his firm a duty to exercise reasonable care and skill, determined by reference to an objective standard. His Lordship rejected the argument that the partner's duty was "to take such a level of care as he would take in relation to his own affairs". 

The decision is not yet available on BAILII but a summary has been provided here by the ICLR as part of its excellent WLR(D) service. The position in Scotland was considered several years ago in Ross Harper and Murphy v Banks [2000] SLT 699

Update (16 March 2009): the decision is now available on BAILII - see here.

Europe: European Private Company (SPE) - Parliament adopts Commission recommendation (with amendments)

The European Parliament has accepted, with amendments, the European Commission's proposal for a new legal form: the European Private Company (SPE). The amendments, which are wide ranging, can be viewed here. The most significant concern employee participation and the requirement that the SPE should have a "cross border component" demonstrated by one of the following: [1] a cross-border business intention or corporate object, [2] an objective to be significantly active in more than one Member State, [3] establishments in different Member States, or [4] a parent company registered in another Member State. 

For further discussion of the SPE, pre-dating the European Parliament's decision, see: M. Siems et. al., "The European Private Company (SPE): An Attractive New Legal Form of Doing Business?", February 2009, published on SSRN and available here

Hungary: Budapest Stock Exchange Corporate Governance Recommendations

The corporate governance codes directory maintained by the European Corporate Governance Institute has been updated to include a copy of the Budapest Stock Exchange Corporate Governance Committee's Corporate Governance Recommendations. Unlike the UK's Combined Code, the BSE's Recommendations are much more prescriptive and contain detailed information concerning, for example, the calling and operation of general meetings. 

Thursday 12 March 2009

UK: the FSA's "intensive supervisory model" and the role of non-executive directors

Hector Sants, chief executive of the Financial Services Authority, has elaborated further on the standards he expects from key participants in the governance of FSA regulated firms. In a speech delivered today, in which he outlined the FSA's new "intensive supervisory model", Mr Sants considered the role of non-executive directors. He stated:

The greater engagement of shareholders and non-executives will be central to this improved regulatory proposition. I talked yesterday at the NAPF conference about shareholders' responsibilities; a word today, albeit briefly, on non-executives' responsibilities. 

Non-executives will need to commit more time and raise their technical skills to exercise rigorous oversight. These changes will no doubt warrant more support and indeed compensation for these individuals. They will also however, need to be more willing to challenge executives. All of this suggests that non-executive directors, as others have already observed, will need to become more like full-time 'Independent Directors'. Sir David Walker’s report will no doubt be addressing these issues in more detail and the FSA looks forward to working closely with him.

However, even with all these changes to supervision and the wider oversight process, we cannot ignore that the principal responsibility for managing firms responsibly lies with the management themselves. It also needs to be recognised that the ultimate responsibility for what has happened rests with firms’ senior management. In reviewing the recent litany of firm failures in many cases, albeit with hindsight, specific decisions and strategies can be seen to be at the root of those firms' demise".

Note: the FSA has already begun to clarify what it expects from non-executive directors: see here

UK: Grant Thornton's annual review of corporate governance 2008

Grant Thornton has published the seventh edition of its annual review of corporate governance disclosures by FTSE350 companies. Its review covered 306 companies and found that 44% stated that they complied fully with the Combined Code on Corporate Governance

Over three quarters of companies had a majority of non-executives on the board. There was also a reduction in the number of directors: the average of 8.5 was down from 9.5 in 2007. The review also found that 55 companies had audit committees where none of the members had recent and relevant financial experience. Combined Code provision C.3.1 provides that the board "should satisfy itself that at least one member of the audit committee has recent and relevant financial experience". 

Note: For earlier reviews see: 2007 | 20062005 |  

UK: institutional investors and corporate governance

The Cadbury Committee observed in its report that "the way in which institutional shareholders use their power to influence the standards of corporate governance is of fundamental importance" (para. 6.10). It is not difficult to see why: UK and overseas institutions own the great majority of shares traded on the London Stock Exchange. Institutional investors are therefore central to the UK's market based based model of corporate governance and the principle of "comply or explain". 

The role of institutional investors was the topic of a speech delivered yesterday by Hector Sants, the chief executive of the Financial Services Authority, at a conference organised by the National Association of Pension Funds. Mr Sants explained his view on the role of institutional investors within the corporate governance framework and made clear what changes he hoped to see, including earlier intervention and greater collective action. Here are several extracts from his speech: 

A lesson for you [institutional shareholders] from this crisis must be that greater interrogation of how well a company is managed and the adequacy of its risk controls are all material factors fundamental to investment management. A focus of a firms' risk control framework must be an effective risk and audit committee and knowledgeable non-executives with a willingness to challenge senior management. Investors must play a role in ensuring such a framework is in place and effective.

Shareholders must also take responsibility to be active individually and more importantly, in collaboration with other investors, to engage with senior management and Non-Executive Directors in companies and question the effectiveness of the construct of their boards.

There are also specific questions around how institutional investors voice concerns and exercise their rights through voting; particularly where there are concerns about business strategy and also management or performance. Once an issue has reached the stage of a public vote, often the stakes are too high to vote down. We would like to see earlier intervention.

Reform is needed to the global regulatory structure but it is important to understand the limits of regulation. Regulators make no claim to be infallible. It is critical to recognise that the principal responsibility for managing firms responsibly remains with the management of the firms and that shareholders are the principal mechanism for holding these managers accountable. Shareholders going forward, have a duty, an obligation to make that oversight role more effective. In order to discharge this obligation you not only have to be more focussed and engaged in individual institutions but also you need to give careful consideration to how you more effectively achieve collective action"

Wednesday 11 March 2009

UK: Scotland: unfair prejudice and excessive remuneration

Yesterday, in the Outer House of the Court of Session, Lord Menzies handed down his opinion in Fowler v Gruber [2009] CSOH 36. The case concerned a petition under Section 459 of the Companies Act (1985) - the unfair prejudice remedy - now found in Section 994 of the Companies Act (2006). The opinion is long, not least because the allegations of unfair prejudice were wide ranging and included exclusion from management, breaches of company law and the payment of excessive remuneration.

Lord Menzies held that the company's affairs had been conducted in an unfairly prejudicial manner and ordered the purchase of the petitioner's shares. In doing so he accepted the approach of the English courts in determining whether remuneration was excessive: the application of "objective commercial criteria" by reference to what other directors, with the same responsibilities and duties, are paid (see, e.g., Irvine v Irvine [2006] EWHC 406 (Ch)). This raises some interesting questions. How does the emphasis on commercial criteria fit with the definition of unfairness adopted by Lord Hoffmann in O'Neill v Phillips [1999] 1 WLR 1092? Will excessive remuneration be regarded as unfair if it is determined by the directors in good faith?

Tuesday 10 March 2009

UK: APB publishes revised draft ethical standards for auditors

The role of external auditors within the corporate governance framework was one of the important questions addressed by the Cadbury Committee's 1992 report. The Committee observed that "[t]he annual audit is one of the cornerstones of corporate governance" but noted that "[t]he framework in which auditors operate, however, is not well designed in certain respects to provide the objectivity which shareholders and the public expect of auditors in carrying out their function".  

The Committee considered several proposals for strengthening the audit framework including the mandatory rotation of audit firms. This was rejected, the Committee noting that "any advantages which this would bring would be more than outweighed by the loss of trust and experience which are built up when the relationships are sound, and by the risk to audit effectiveness at the changeover".  The Committee did, however, recommend that in listed companies there should be a periodic change of audit partners in order to bring a "fresh approach" to the audit. 

Audit partner rotation is one of the matters considered by the Auditing Practices Board in a consultation paper published yesterday. The paper sets out revised draft ethical standards for auditors and considers whether the rotation period for the audit engagement partner should be five or seven years. Five years is the current requirement in the APB's Ethical Standard 3 - Long Association with the Audit Engagement (see paragraph 12)

The APB notes in its consultation paper the concern expressed by some audit committee chairmen that a five year limit does not necessarily promote audit quality. For this reason, the APB seeks views on its proposal to permit the audit committee to extend the tenure of the audit engagement partner of a large listed company, where the company is complex or diverse, providing the committee is satisfied with the audit engagement partner's objectivity and considers that audit quality will be safeguarded by the extension to seven years. If an audit committee so decides, the APB proposes that this would require disclosure to the shareholders.

UK: AIC code of corporate governance for investment companies - new edition

The Association of Investment Companies has published an updated edition of its code of corporate governance for investment companies. The code is endorsed by the Financial Reporting Council and its purpose (to quote directly from its introduction) is to:

... provide boards of our Member companies with a framework of best practice in respect of the governance of investment companies. The intention behind the AIC Code is to create a one-stop approach to corporate governance which deals with all the issues relevant to investment companies and enables boards to satisfy any requirements they may have under the Combined Code on Corporate Governance (Combined Code)".

Monday 9 March 2009

UK: financial stability and the tripartite model - Sir James Sassoon's report

Last year the Shadow Chancellor of the Exchequer, George Osborne, commissioned Sir James Sassoon to conduct an independent review of the tripartite system of financial regulation. Sir James' report was published today and is available here. Sir James writes in today's Financial Times newspaper:

I want to kick start the debate on what a new UK framework to protect financial stability should look like. In other countries this debate is already well under way. The US Treasury produced a blueprint for a new regulatory system last year. Jacques de Larosière has been reviewing the structure of European financial regulation. However, the UK authorities have yet to bring forward ideas on how fundamental parts of the system should be reformed. Stronger international regulation is undoubtedly needed. But it is UK taxpayers’ money that is deployed to sort out any crisis, and it is the UK authorities who must be the main guardians of our financial stability. In order to protect our economy and the taxpayer, the new domestic framework must have prudential regulation at its core. One of the most important lessons from the crisis is that we need greater focus both on the macro-prudential (the risk across the system) and the micro-prudential (the risk in individual institutions). But we must not do this in a way that weakens regulation aimed at consumer protection".

UK: a code of ethics for remuneration consultants?

A few days after Lord Myners' comments in the House of Lords concerning remuneration consultants, yesterday's Sunday Times newspaper reported that the Association of British Insurers is calling for remuneration consultants to be subject to a code of ethics. In the report, the ABI's assistant director of investment affairs, Marc Jobling, is quoted:

“Pay consultants are a big contributor to the problems around executive pay. We have heard of some who admit they work for both management and independent directors — which is a clear conflict of interest and not acceptable. We believe that remuneration consultants, whose livelihood appears to depend on pushing an ever-upward spiral in executive pay, should be obliged to develop a code of ethics.”

The role of the directors on the remuneration committee should not, of course, be overlooked. In this regard the Combined Code supporting principle B.1 explains:

The remuneration committee should judge where to position their company relative to other companies. But they should use such comparisons with caution, in view of the risk of an upward ratchet of remuneration levels with no corresponding improvement in performance. They should also be sensitive to pay and employment conditions elsewhere in the group, especially when determining annual salary increases".

Friday 6 March 2009

UK: banks and executive pay - Lord Myners replies

Yesterday, in the House of LordsLord Lea of Crondall asked the Government this question: "whether they will place an annual limit of £500,000 on the pay of executives in financial institutions in receipt of substantial public funding". Amongst his comments in reply, Lord Myners, the Financial Services Secretary to the Treasury, observed:

"...all shareholders take risks which relate to equity capital, and the Government, through UKFI, stand alongside other shareholders in that respect. We have been very clear that we find the level and structure of reward in the banking sector unacceptable. We have invited Sir David Walker to lead a report in this area. From my perspective, one of the things that it should address is the insidious influence of external benchmarking and comparators by so-called benefit consultants. There needs to be much more awareness of internal comparators and perceived fairness. The rewards and remuneration for those at the top of the organisation have simply become detached from those of their colleagues and from reality. There should be further disclosure, and there are important roles for shareholders".

For the official record, including other questions and replies, see here. It would be interesting to know what further disclosure Lord Myners envisages, given what must already be disclosed in the remuneration report. It would also be interesting to know if Lord Myners supports the Companies Remuneration Reports Bill which if passed would require companies to disclose the ratio between the total annual remuneration of the highest paid director or executive and the total annual average remuneration of the lowest paid ten per cent of the workforce. The Bill, which was introduced in the House of Lords, has had its first reading but a date for second reading debate has not yet been fixed. 

USA: Delaware: the business judgment rule and director liability for risk oversight

Posts on the Delaware Corporate and Commercial Litigation Blog and the Harvard Law School's Corporate Governance Forum have alerted me to the Delaware Court of Chancery decision Re Citigroup Inc. Shareholder Derivative Litigation, No. 3338-CC (Feb. 24, 2009). The decision indicates the difficulties shareholders will face in arguing breach of duty by directors in respect of risk oversight and provides a very strong endorsement of the business judgment rule. The opening paragraph of Chancellor Chandler's opinion sets the scene well:

This is a shareholder derivative action brought on behalf of Citigroup Inc. (“Citigroup” or the “Company”), seeking to recover for the Company its losses arising from exposure to the subprime lending market. Plaintiffs, shareholders of Citigroup, brought this action against current and former directors and officers of Citigroup, alleging, in essence, that the defendants breached their fiduciary duties by failing to properly monitor and manage the risks the Company faced from problems in the subprime lending market and for failing to properly disclose Citigroup’s exposure to subprime assets. Plaintiffs allege that there were extensive “red flags” that should have given defendants notice of the problems that were brewing in the real estate and credit markets and that defendants ignored these warnings in the pursuit of short term profits and at the expense of the Company’s long term viability".

With regard to the business judgment rule's operation in respect of directors' oversight and risk management, Chancellor Chandler stated:

The Delaware Supreme Court made clear in Stone that directors of Delaware corporations have certain responsibilities to implement and monitor a system of oversight; however, this obligation does not eviscerate the core protections of the business judgment rule—protections designed to allow corporate managers and directors to pursue risky transactions without the specter of being held personally liable if those decisions turn out poorly. Accordingly, the burden required for a plaintiff to rebut the presumption of the business judgment rule by showing gross negligence is a difficult one, and the burden to show bad faith is even higher..."

"Business decision-makers must operate in the real world, with imperfect information, limited resources, and an uncertain future. To impose liability on directors for making a “wrong” business decision would cripple their ability to earn returns for investors by taking business risks. Indeed, this kind of judicial second guessing is what the business judgment rule was designed to prevent, and even if a complaint is framed under a Caremark theory, this Court will not abandon such bedrock principles of Delaware fiduciary duty law."

The claims relating to oversight were dismissed but one claim, arguing corporate waste in respect of CEO pay, was not. For further discussion, see here and here

Thursday 5 March 2009

China: executive pay in state owned enterprises

China Daily reports here that legislation is being drafted to set a cap on executive pay in state owned enterprises (SOE). The cap in each SOE will be based on average pay within the SOE. It will be interesting to see how average pay is calculated. 

UK: the Companies (Shares and Share Capital) Order 2009

The Companies (Shares and Share Capital) Order 2009 was laid before Parliament on 27 February and comes into force on 1 October 2009. A copy is available on OPSI in html and pdf. An explanatory memorandum is available here (pdf) and to quote directly from it:

Where an unlimited company allots a new class of shares, section 556 of the [Companies Act 2006] requires it to deliver to the registrar of companies a return of the allotment containing prescribed particulars of the rights attached to the shares. This Order prescribes the particulars. The Order [also] prescribes the information that must be included in a return of an allotment delivered to the registrar of companies under section 555 of the Act (return of an allotment of shares by a limited company).

Provisions dealing with the authorised minimum capital requirement for public companies in the context of provisions of the 2006 Act which are coming into force on 1 October 2009 have ... not been included in the [Order] ...  as originally proposed. The Department will be making separate Regulations at a later date to deal with those matters, to come into force on 1 October 2009".

Portugal: the Securities Market Commission corporate governance code

The corporate governance codes directory maintained by the European Corporate Governance Institute has been updated to include a copy of the governance code published by the Portuguese Securities Market Commission. The code is available here in English and here in Portuguese. 

Wednesday 4 March 2009

Europe: private equity and hedge fund regulation

Private equity and hedge funds were the subject of a recent European conference, at which the opening speech was delivered by European Internal Market Commissioner Charlie McCreevy. Mr McCreevy has not been an enthusiastic supporter of greater regulation but he nevertheless observed: "[c]loser, direct regulatory and supervisory oversight of hedge funds and private equity is inevitable ... The Commission is committed to bringing forward an appropriate legislative initiative which I intend to present ... before [the] end [of] April".

With regard to the shape of the new regulatory regime, the European Private Equity and Venture Capital Association has published its response to the European Parliament and Commission. It states:

...the private equity and venture capital industry intends to cooperate very closely with the European Commission and the other EU Institutions in developing an appropriate and proportionate regulatory framework. We believe that this framework should consist of enhanced unified professional standards and an effective enforcement regime with oversight thereof by the appropriate national or European bodies".

Elsewhere, private equity is the focus of the winter 2008 research newsletter published by the European Corporate Governance Institute. The newsletter contains summaries of recent articles on this topic from the ECGI's working paper series as well as interviews with a couple of practitioners and an academic.

Tuesday 3 March 2009

Switzerland: say on pay

Ethos - the Swiss Foundation for Sustainable Development, created in February 1997 by two Geneva based pension funds and currently composed of 78 institutional investors - has reported here that three Swiss companies - Credit Suisse Group, Nestlé and UBS - have agreed to provide shareholders with an advisory vote on their remuneration reports.

UK: corporate reporting - CIMA study

Today's Times newspaper contains an opinion piece titled Corporate reports in narrative style give better impression by the CIMA chief executive Charles Tilley. The article refers to a new CIMA report, published today, titled Complexity, Relevance and Clarity of Corporate Reporting; Views of CIMA FTSE350 Directors.

UK: APB announces major update of auditing standards

The Auditing Practices Board has announced that it will be updating its auditing standards in line with the new International Standards on Auditing issued by the International Auditing and Assurance Standards Board (IAASB) as part of its Clarity Project. The new UK and Irish standards will be effective for audits of financial statements for periods ending on or after 15 December 2010. The APB proposes, before the end of April, to issue an exposure draft containing a complete set of its proposed new standards. These will be subject to a three month consultation period with the aim of publishing final standards in the autumn.

The APB consulted on its plans in October 2008: see its consultation paper here and responses here

Monday 2 March 2009

UK: rewards for failure, the court of public opinion and human rights

Yesterday's comments by the Rt. Hon. Harriet Harman QC MP concerning Sir Fred Goodwin's pension have been widely reported. Ms Harman provided this eminently quotable statement concerning the pension agreement: "...it might be enforceable in a court of law, this contract, but it is not enforceable in the court of public opinion and that is where the government steps in". 

This has been interpreted by some as an indication that the Government may legislate to reduce Sir Fred's pension entitlement. The difficulties with such an approach - which would involve rewriting contracts - were rehearsed several years ago when the Company Directors’ Performance and Compensation Bill 2002-03 was introduced in Parliament as a Private Members' Bill by Archie Norman MP. The Bill would have resulted in directors'  compensation for loss of office being subject to a test of reasonableness in the light of any failure by the director. It did not receive Government support (see here) and was killed off at Second Reading (see Hansard for the controversial way in which this was done: HC Deb 31 January 2003 vol 398 cc1147-8). Nevertheless, the Government introduced a mandatory advisory vote for the shareholders of quoted companies with regard to the company's remuneration report (see, now, Section 439 of the Companies Act (2006)).

Of relevance to the current debate was the opinion of the then Parliamentary Joint Committee on Human Rights with regard to Archie Norman's Bill. The Committee explained that the Bill:

... appears to make it possible to deny payment of money legally due to a director, interfering with the director's right to peaceful enjoyment of possessions and depriving the director of property protected by Article 1 of Protocol No. 1 to the [European Convention on Human Rights]. The Committee is concerned about the possibility that this might be incompatible with two sets of rights under that Article: first, the right of the director to money legally due to him or her; secondly, the right of the company to use its property and enter into contracts as seems best to it. Under Article 1, compensation for a deprivation of property in the public interest is required save in exceptional circumstances, and any control on the use of property must strike a fair balance between the rights of property owners and the general public interest (which may itself demand compensation in some circumstances)."

UK: the Bank Administration (England and Wales) Rules 2009

The Bank Administration (England and Wales) Rules 2009 were made on 23 February and came into force on 25 February. A copy is available on the OPSI website: see here (HTML) or here (PDF). An explanatory memorandum has also been published. The Rules set out the procedure for the bank administration procedure introduced by Part 3 of the Banking Act 2009. They are based on the rules for administration in Part 2 of the Insolvency Rules 1986.